One of the most unfamiliar state reporting obligations and exposure for companies is unclaimed property. Many companies may not be aware of, or fully understand, the 50 states of unclaimed property rules, regulations, and statutes. Yes, that’s correct, every U.S. state in addition to the District of Columbia, Puerto Rico, Guam, and the U.S. Virgin Islands have unclaimed property laws that require companies to report and remit unclaimed property which they’re currently in the possession of. If your business is holding onto unclaimed property without properly accounting and reporting for it, you are at risk for potential future state audit assessments, including interest and penalty consequences.
What is Unclaimed Property?
Unclaimed property (also known as abandoned or escheat property) is tangible or intangible personal property that’s in the custody of a person or business (“holder”), but is owned by another party. The purpose of unclaimed property laws are to ensure the protection and the pursuit of finding the rightful owner to the abandoned property. A few examples of types of unclaimed property are: uncashed payroll checks, uncashed vendor checks, gift certificates/cards, customer merchandise credits, safe-deposit boxes, matured time deposits, 401(k) and retirement accounts, and escrow accounts.
It’s important to note that unclaimed property is not considered a tax on a company or individual. State filing deadlines, year-ends, statute of limitations, exemptions, and dormancy periods all vary state to state. The term “dormancy period” is defined as a set period of time, which may begin from the date of the last transaction on record with the property or the date of when the property was issued (e.g. check issuance date), and ends at a prescribed number of years (varies based on property type but typically 1-5 years). Once this period of time has elapsed, the property is deemed to have become abandoned.
Unclaimed Property Reporting Process
If you are a holder of unclaimed property, it’s essential to implement an organized plan for accounting and reporting the property. Below is a general step by step plan to identify, track, report, and remit abandoned property.
Step 1: Identify unclaimed property to be reported and remitted
The initial step for a holder is to identify their abandoned property. Reviewing outstanding checks, customer accounts, unused gift certificate are a few common areas to analyze each year. Once unclaimed property has been identified, the company should maintain a log to record a list of the unclaimed property type(s), monetary value, date issued, dormancy period, and the owner information. Once the dormancy time has passed, the holder must begin the state’s reporting process. The primary rule in determining that state to report abandoned property is based on where the owner’s last known address was located.
Step 2: Perform due diligence
Due diligence by the holder is generally required by every state prior to filing and remitting the property. This is the process where the holder attempts to notify the owner via telephone or mail, but usually with a formal letter, to notify the owner that their property has become abandoned and by law is required to be transferred over to the state’s possession within a certain amount of days from the date of the letter.
Step 3: Prepare and submit the report of unclaimed property and remittance
Once the identified property that has reached the required dormancy period, it becomes unclaimed property and must be reported and remitted to the state by the due date of the state filing in. Some states enable holders to file the report and remittance (for cash payments) on the state’s unclaimed property website, or by mailing them in. For safe deposit box, securities, or other escheat property, it’s important to refer to the state’s holder reporting instructions for the proper remittance of the property.
Why Should You Care?
Although it may seem as a nice gesture for states to take over the responsibility of abandoned property, it’s actually become a major revenue stream for them. Once a holder remits their unclaimed property to a state, the property is for the state to keep, unless the rightful owner eventually comes forward to claim it. According to various sources, states hold a combined total of approximately $42 Billion of unclaimed property!
As states have become more aggressive for additional revenue, they are constantly changing their unclaimed property laws in order to cast a wider net of reportable property. In addition, states are on the lookout for non-compliant holders and utilize third party contractor audit firms to conduct unclaimed property audits. If the exposure of an audit isn’t worrisome enough for a holder, be aware that many states do not actually have a statute of limitations for unclaimed property. That is, a state’s assessment on a holder potentially could go back to the holder’s date of inception if no report was ever previously filed.
And yes, states will include interest and penalties similar to income tax returns for failure to file, and paying timely. The good news is that many states do offer voluntary disclosure programs for unclaimed property and if you are admitted into the program, the state will generally waive all interest and penalties for the previous years of non-compliance.
Step 4: Call Freed Maxick
Don’t put your business at risk! Third party audit firms working on behalf of states have the same incentives in order to maintain their contractual relationship: to find more property and non-compliance filers of holders. Freed Maxick can help. We’re tasked with finding compliance issues, working with the states directly through voluntary disclosures, filing your unclaimed property reports and tracking due dates, or helping you through an unclaimed property audit.
If you think you may have unclaimed property reporting exposure with your business and would like to discuss further with one of our State and Local Tax Experts, click here or call us at 716-847-2651.View full article
Author: Don Warrant, CPA, Director
Many companies or “holders” own personal or business properties that become abandoned or unclaimed once there has been an inactive dormancy period. Dormancy periods can vary, but most are five years.
Companies that have unclaimed property exposure in Delaware (DE) generally must forward such property to the state of incorporation, which often is Delaware (due to Delaware's well established corporate laws, and appealing tax rates). Since businesses have potential exposure to report all abandoned property dating back to 1981, the new Delaware voluntary disclosure agreement (VDA) program may offer companies an opportunity to decrease their unclaimed property exposure by limiting their look-back of liability (to 1996, or 1993). There are also no contingency fees, and no exposure to audit by the State Escheator until after July 1st, 2015.
Business that are in or incorporated in Delaware, may want to act quickly. Contacting a CPA may be a good step to evaluate whether any of your businesses might benefit from applying to this VDA. This is especially true for those companies in New York State that may be unaware of abandoned property in Delaware. Businesses with possible unclaimed property due to Delaware should carefully evaluate their compliance with the Delaware unclaimed property laws and assess their exposure against the potential benefits of the VDA program for their various types of reportable property. Property holders should exercise caution and perform their own due diligence in participating in the program. Applications for the full benefits of the VDA program are due by the June 30, 2013, so you must act quickly.
Unclaimed Property Self Audit
Businesses considering approaching states (such as Delaware) to enter unclaimed property VDAs should consider proactively conducting a self-audit, with the help of a CPA advisor, prior to approaching the state. The company should:
- Assess areas of exposure
- Review available records (e.g., payroll, accounts receivable, accounts payable, general ledgers, bank statements and reconciliations, equity and transfer agent reports)
- Evaluate unclaimed property reporting to other states, and
- Mitigate exposure by identifying applicable exemptions and possibly returning abandoned property to known owners prior to instituting the VDA process.